IOSR Journal of Economics and Finance (IOSR-JEF) e-ISSN: 2321-5933, p-ISSN: 2321-5925.Volume 3, Issue 2. Ver. II (Mar-Apr. 2014), PP 21-26 www.iosrjournals.org Critical Analysis of Pakistan Automobile Industry From 1995 to 2005 Muhammad Aqil1, Syed Fazal Aziz2, Muhammed Dilshad3, Seemab Qadeer4 1( Assistant Professor, Commerce Department, Defence Authority Degree College, Karachi, Pakistan) 2 (Senior Executive Vice President(retd), National Bank of Pakistan, Karachi, Pakistan) 3 (Lecture, Government Degree College, Paretabad, Hyderabad, Pakistan) 4 (Assistant Professor, Economics Department, Defence Authority Degree College, Karachi, Pakistan) Abstract: The automobile industry is one of the most important industries in large scale manufacturing sector. The automobile industry in Pakistan performed very well during the period of 1995 and 2005. However, there were many areas where the performance of industry was not up to the mark. This paper identifies the areas where this sector needs improvements. The analysis reveals that the industry did not have proper capacity utilization facility, it failed to offer competitive environment, it worked with low level of indigenization, it was suffered from inconsistent policies, it could not properly exploited consumers’ demand and it failed to protect consumers’ sovereignty. Keywords: automobile industry, capacity utilization, consumers’ demand, inconsistent policies, indigenization I. Introduction The vehicle Industry in Pakistan emerged as one of the rapidly growing sectors during last couple of years. The sector affected the economy positively from various aspects. The industry contributed a lot to GDP, it generated direct and indirect employment, it gave birth to many subsidiary industries. Apart from these positive aspects, there are many questions on the performance of this industry. For instance, the industry was unable to achieve adequate indigenization level in spite of high protection rate. In addition to this, the role of regulatory authorities (such as PAMA, PAAPAM and CBR) was ineffective and the bodies are unable to provide a proper direction to the sector. The industry was also not able to protect consumers’ sovereignty as the industry has an oligopoly structure. The objective of this paper is to analyze the progress of the automobile industry critically from the period of 1995 to 2010. II. Problems In The Automobile Industry There are following issues and problems faced by the automobile industry: 2.1 Less Competitive Structure The behavior of a firm depends upon the structure of market to a great extent. For instance, the performance of a firm in a laissez fair market would be different if the firm is working in a closed economy. Likewise, a firm may book large amount of returns in monopoly and may fail to sustain the profit level in a monopolistic competition market. All of these variations are applicable for the automobile industry in Pakistan. As far as the Automobile Industry of Pakistan is concerned, the sector had enjoyed good protection against the foreign competition by means of tariff and non-tariff barriers. Therefore, the Original Equipment Manufacturers could not offer a competitive environment as there was a very tight monopoly or oligopoly structure in the market. For instance, Pak Suzuki Company enjoyed monopoly in the manufacturing and supply of 800 cc and 1000 cc vehicles during 1995-2005. Whereas Toyota and Honda companies formed a duopoly in the manufacturing of above 1000 cc cars. Hino Pak Motors appeared as a dominant firm in the trucks and buses sector while Millat Tractors claimed a lion share in the manufacturing and supply of the Agricultural Tractors. This picture is portrayed by the above table 1. The table depicts that the automobile market was governed by very few Original Equipment Manufacturers and the market lacked a free and healthy competitive environment. Table 1: Market share of leading companies (2005) Vehicle type Vehicle name Company Market share Car-1300 2000cc Toyota Corolla Indus Motors 42.99% Car-1000cc Cultus Pak Suzuki 45.85% Car-800 cc Mehran Pak Suzuki 66.31% Jeep-4*4 Potohar Pak Suzuki 73.12% Pick up/L.C.V. Shehzore Hyundai 49.15% Motorcycle Honda Honda 68.85% Truck Nissan Truck Nissan 39.64% Bus Hino Hino 80.56% Farm Tractor Massey Ferguson Millat 51.44% www.iosrjournals.org 21 | Page Critical Analysis of Pakistan Automobile Industry from 1995 to 2005 Source: Pakistan Automaitve Manufacturers Association [1] At this point of time, it would be pertinent to use the Herfindahl Index (HHI) in order to find out the degree of competition in the sector. The index is used as measure of the size of firms and amount of competition between the firms. When the HHI was calculated for Pakistan’s automobile industry, the following results were derived [2]: HHI for Cars =4,948 HHI for LCVs = 5,400 HHI for Trucks and Buses = 3,950 HHI for Tractors = 4,250 Analysis of HHI suggested that the industry had a tight oligopoly market structure with very high concentration ratios. Due to the high values of HHI, it is concluded that the auto market lacked free competition environment. 2.2 High Protection Rate Trade liberalization is very important in today’s open market environment. This enables the economies of large scale, optimum use of world resources, rise in demand for goods, increase in world’s GDP and massive growth in investment level. Although the infant industry argument is valid for the economies like Pakistan, high protectionism is very difficult due to World Trade Organization. Moreover, it also rightly believed that long term trade barriers are just like slow poisoning to the industry that kill the production and innovation capabilities of the forms. The automobile sector in Pakistan had been sheltered by many trade barriers to avoid foreign competition. Despite the high rate of protection, the import bill for the sector was quite substantial. Table 2 reflects that from 1996-97 to 2004-05, there was an upward movement in the import of automobile as the size inclined to 5.2% in 2004-05 from 2.44% nine years ago. The import of vehicle was Rs.17,391.65 million in 1996-97 which reached the level of Rs. 63,494.67 million after nine years. The situation was not apparently favorable for the country and certain concrete measures were required to curtail the import bill on account of motor vehicles. Table 2: Imports of automobile (in Rs. million) Year Road Motor vehicles Road vehicles other than Total imports of vehicles Share in total imports motor vehicles 1996-97 14,883.715 2,507.938 17,391.65 2.44% 1997-98 13,087.189 2,015.812 1,5103 3.46% 1998-99 13,518.813 2,158.495 15,677.31 3.36% 1999-00 15,534.822 2,358.808 17,893.63 3.35% 2000-01 16,180.616 2,554.737 18,735.35 2.99% 2001-02 17,567.650 2,654.938 20,222.59 3.19% 2002-03 25,791.307 3,494.758 29,286.07 4.1% 2003-04 32,467.918 5,108.477 37,576.4 4.2% 2004-05 56,836.478 6,658.192 63,494.67 5.2% Source” FBS [3] 2.1 Effective Protection Rate (EPR) Effective Protection Rate states how much an industry is protected from the foreign competition. The automobile industry is assumed to be one of the most protected industries in the country. The industry comparatively enjoyed a very high effective protection rate. The table 3 reveals the effective protection rate for the industry in 1997. Table 3: Effective protection rate to auto industry Vehicle type Import % Tariff Tariff EPR CKD/ RM CBU CKD/ RM 1500 CC 70% 150% 32% 425% 800 CC 40% 110% 32% 162% Tractrors 20% 35% 32% 36% Vendors using S-form 30% 45% 20% 56% Without S-form 30% 45% 65% 36% Without S- form and competing against 30% 20% 65% 1% smuggled items Source: Pakistan and Gulf Economist In the beginning of 21st century, the effective protection rate (EPR) for automobile industry increased sharply which ranged from 701 per cent to 5,000 per cent [4]. The objective of such protection rate was to www.iosrjournals.org 22 | Page Critical Analysis of Pakistan Automobile Industry from 1995 to 2005 enable the industry to achieve the desired level of indigenization. However, the industry could not achieve the set target and it indulged in short term objectives of maximization of profit. The high EPR made the local industry dull, uncompetitive and profit oriented. One important example in this regard is that Pak Suzuki Motor Company booked the profit of Rs.148.716 million in 2002 as against Rs.52.97 million in 2001 [5]. As a result, the experts and analysts charged the sector for creating monopoly, offering few choices to consumers, selling vehicles on higher prices and booking very high margin of profits. Further, the industry also entered into the post WTO scenario especially with the provisions of Trade Related Investment Measures (TRIMS) and Trade Related Intellectual Property Rights (TRIPS). In those circumstances, the sector was not likely to afford such a high rate of protection and the industry had to face a very difficult time from the giants of world’s auto manufacturers. Regardless of the threats from WTO regime, there was immense pressure from the dealers of used cars who persuaded the authorities to allow the import of old and reconditioned vehicles. The dealers had always been attempting in the past to influence the authorities to get a favorable decision. Once they succeeded in their efforts, the government would be forced to allow the import of used vehicles with certain relaxed conditions. Therefore, the industry was required to take serious measures so as to stand confidently on its own toes to cope with the challenges.